OVERRIDING INTEREST Spring 2015 Highlighting developments and issues in the real estate industry OVERRIDING INTEREST CONTENTS Dilapidations—How to Avoid Costly Mistakes Page 3 MIPIM 2015 Page 6 Announcements & Events Page 8 ransaction Profile: The Old Royal High T School, Edinburgh Page 11 UK Real Estate Structures Page 12 Legal Updates and Cases Page 14 Dilapidations—How to Avoid Costly Mistakes Introduction Whether you are a landlord or a tenant of commercial premises, it is vital to think about the potential for terminal dilapidations well before the expiry of the lease. This may sound obvious but is something which is often left rather late. The law of dilapidations is complex and, in terms of quantum, there are hurdles for the unwary landlord and tenant which, if not thought about and dealt with properly, can prove to be costly. Since the introduction of the Dilapidations Pre-action Protocol there are even more steps which landlords and tenants and their surveyors need to comply with. For landlords, well before the expiry of the required to remedy the breaches and that lease careful consideration should be given the landlord’s intention for the property The first, and one might think most to the obligations of the tenant and how is being taken into account and that any obvious, consideration is to ensure there is those may be impacted by plans for the costings are reasonable. a proper understanding of the contractual building after expiry of the term. The Lease obligations imposed by the repairing covenant in the lease. However those obligations may not be easy to construe, In good time the landlord’s building particularly if there is wording which is surveyor should prepare a schedule of slightly out of the ordinary, or the obligation dilapidations, in a form compliant with is by reference to a schedule of condition. the Pre-action Protocol, setting out what All too often there is a mismatch of approach or understanding of the lease obligations between landlord and tenant or building KEY CONTACTS Steven Cox +44.(0)20.7360.8213 steven.cox@klgates.com surveyors and lawyers. This can be a recipe for an expensive dispute. Even if agreement 2 K&L GATES: OVERRIDING INTEREST SPRING 2015 the landlord considers to be the breaches of the repairing obligations in the lease, the works required to be done to remedy those beaches and, if relevant, the landlord’s costings. cannot be reached, it is important to The schedule should be sent within a understand the respective approaches as reasonable time but that is generally early in the process as possible. within 56 days after the termination of For the unwary tenant, relatively innocuous Bonny Hedderly +44.(0)20.7360.8192 bonny.hedderly@klgates.com The Protocol sounding repairing obligations can in fact be much more onerous than they had realised. the tenancy. The Pre-action Protocol imposes a requirement that the schedule be endorsed to confirm that the work set out in the schedule is reasonably There are obligations on the tenant in relation to the timing and information to be included in the response. There is an obligation for the landlord and tenant (usually by their respective surveyors) to meet on a without prejudice basis with a view to trying to agree as many items in dispute as possible. The protocol encourages alternative dispute resolution as the courts take the view that litigation should be a last resort. Section 18(1) The common law rule is that, if a tenant leaves property in disrepair, he will be liable for the cost of the repair and the loss of rent for the time it would take to do the repairs. However, common law damages for dilapidations are subject to two statutory 3 OVERRIDING INTEREST Dilapidations—How to Avoid Costly Mistakes limitations set out in Section 18(1) of the This can have a huge difference on the For landlords with expectations of recovery Landlord and Tenant Act 1927. amount of damages for dilapidations of substantial dilapidations from tenants ultimately payable. The well advised at expiry of their lease, great care must landlord will consider his options early but be taken not to commit to redevelop too not necessarily commit to what works he early since this can afford the tenant an will undertake. The wise tenant will find out opportunity to deny liability on the basis as much as he can about the landlord’s of supersession. Supercession generally is intention with a view to making a sensible an area which is fraught with difficulty and offer which may give him costs protection often leads to significant disputes. The first limitation is well known—but not always well understood—namely that damages cannot exceed the diminution in the value to the reversion caused by the disrepair. Diminution in value of the reversion is thought by some to equate to the cost of repair works but it can be much more complicated than that. The second is that no damage shall be recovered for a breach of any agreement to leave premises in repair at the termination of a lease, if it is shown that the premises, in whatever state of repair they might be, would at or shortly after the termination of the tenancy have been pulled down, or such structural alterations made therein as would render valueless the repairs covered by the covenant or agreement. To benefit from this aspect of Section 18, the tenant must demonstrate that the landlord had formed an intention to carry out superseding works by the termination date of the lease and had intended to do so “in whatever state of repair” the premises might be. Supersession should a sensible commercial resolution of the dispute not be achieved. Careful use of Part 36 offers (without prejudice save as to costs) can be a valuable tactic to be deployed by landlords or tenants even before proceedings are issued. For a tenant it is a method of potentially displacing the otherwise inevitable costs obligation arising from a dilapidations claim. It is surprising how Conclusion Both landlords and tenants involved These disputes are not cheap— hence the importance of considering Part 36 offers early. with leases due to expire and give rise to potentially significant dilapidations liability should seek advice early to maximise recovery on the part of landlords and minimise them where it is tenants who are paying. This is a complex area of the law and great care needs to be taken. rarely this is used as it can place pressure on a landlord who otherwise is confident Jane Harte-Lovelace that costs will end up being picked up by +44 (0)20 7360 8172 the tenant. jane.harte-lovelace@klgates.com A hotly disputed dilapidations case will often require the involvement of a surveyor with Section 18 valuation experience in addition to a building surveyor. These disputes are not cheap—hence the importance of considering Part 36 offers early. Many tenants’ surveyors will return a Although the vast majority of dilapidations schedule of dilapidations denying liability cases are agreed by negotiation between for repairs on the basis of “supersession”, the building surveyors, there are an i.e. that the works which the landlord is increasing number of disputes particularly going to do render the repair works to where the tenant argues that the landlord remedy the breach unnecessary. This is not is not going to carry out the works in the get out of jail card which some tenants schedule and has already decided think and this is an area where great care to redevelop and generally involving needs to be taken both by landlords and supersession arguments. tenants in assessing and deciding what works will be undertaken and when. 4 K&L GATES: OVERRIDING INTEREST SPRING 2015 5 OVERRIDING INTEREST Global Real Estate Team MIPIM 2015 MIPIM 2015, Cannes, France 10th—13th March 2015 MIPIM is the leading networking event for property professionals; its organisers describe it as a “market for international property Members of the Real Estate, Planning and Finance teams will be attending MIPIM 2015 and hope to meet you there. trade”—25,000+ real estate professionals attend to view projects, assess profitable ventures, strike deals, discover commercial real estate opportunities and seek out market information. The European Real Estate, London Paul Alger +44 7958 135 774 Paul.Alger@klgates.com Sebastian Charles +44 7958 117 929 Sebastian.Charles@klgates.com Bonny Hedderly +44 7932 820 575 Bonny.Hedderly@klgates.com Amandeep Lafferty +44 7958 135 363 Amandeep.Lafferty@klgates.com Christian Major +44 7958 135 153 Christian.Major@klgates.com Barry McHugh +44 7960 161 161 Barry.McHugh@klgates.com Andrew Petersen +44 7958 694 124 Andrew.Petersen@klgates.com Planning and Finance teams are currently pre-planning for this year’s conference and we are looking forward to meeting with professionals across all international property sectors. To arrange to meet with any member of the Team at MIPIM 2015, please contact a team member directly or get in touch with Bonny Hedderly (bonny.hedderly@klgates.com). To learn more about our Real Estate Investment, Development, and Finance Berlin Georg Foerstner +49 151 1215 9175 Georg.Foerstner@klgates.com Felix Greuner +49 151 1428 2655 Felix.Greuner@klgates.com +49 170 922 2869 Rainer.Schmitt@klgates.com +39 329 114 8936 Francesco.Sanna@klgates.com Joanna Klat* +971 529 218 125 Joanna.Klat@klgates.com Edouard Vitry +33 6 09 44 83 85 Edouard.Vitry@klgates.com practice, please scan the QR code below. Frankfurt Rainer Schmitt Milan Francesco Sanna Paris * Joanna is also based in Dubai Warsaw Patryk Galicki+48 600 091 228Patryk.Galicki@klgates.com Halina Wieckowska 6 K&L GATES: OVERRIDING INTEREST SPRING 2015 +48 516 149 759 Halina.Wieckowska@klgates.com 7 OVERRIDING INTEREST Announcements and Events New Joiners Joanna Payne Joanne McGilloway AFIRE 2015 Winter Conference For more information please contact London London The Association of Foreign Investors in Steven Cox (steven.cox@klgates.com). Joanna is a senior associate Joanne is an associate in Real Estate (AFIRE) is a not-for-profit the firm’s London office association representing the interests of in the firm’s London office CREFC Spring Conference On 16th–17th April 2015, the K&L Gates and is a member of the Real Estate practice and is a member of the Construction and nearly 200 investing organisations from 21 group focusing on investment, development Engineering practice. Joanne has acted for different countries. and management. major developers and institutional investors Partners from our U.S. offices will attend 2015. This conference will be attended by on real estate development work advising the conference this year. The Winter more than 200 delegates over two days and on construction–related matters. She has Conference is an annual two-day meeting provides a platform for commercial real particular experience in non–contentious held on 11th and 12th February in New estate (CRE) finance participants to come work which includes drafting and York. The topics featured are specific to together to learn about and discuss the negotiating construction and engineering the U.S., with a portion directly focused latest trends and challenges facing contracts. She also has experience advising on New York City and the surrounding the industry. clients in the nuclear, education and areas. Results of the AFIRE Annual Foreign pharmaceutical sectors. Investment Survey and a member survey Her work includes the drafting and negotiation of sale and purchase agreements and associated documentation, the drafting of certificates of title for sales of properties and carrying out due diligence and drafting reports on title and advising on the risks involved on purchases. Joanna has particular experience covering investments (acquisitions and disposals), management, development and corporate real estate. Martina Triacca highlighting trends in international real Recent and Upcoming Events estate investment are also presented. IPD EcoPAS – Q3 2014 Update For more information about AFIRE or the On 3rd December 2014, the London office hosted the IPD EcoPAS Q3 2014 Milan Update breakfast seminar. This seminar Martina is an associate in was chaired by Ian Cullen of MSCI and the firm’s Milan office and included a presentation by Peter Hobbs, she works in the Administrative and Town Head of Real Estate Research, MSCI Planning law department. on the latest results from IPD EcoPAS Martina has developed significant experience in the legal matters related to administrative law, focusing on the construction of private and public works, town planning, environmental and landscape issues, development of energy projects, infrastructures, regulatory compliance, commercial authorizations/ licences and public tenders, advising measurement service. The presentation was followed by a panel discussion by key investment and valuation professionals including Steven Cox of K&L Gates and senior representatives from Barclays, CBRE and Mayfair Capital. The panel discussed the direction of IPD EcoPAS and sustainability within the UK property industry. Winter Conference please contact Matt of the CREFC Europe Spring Conference The conference will be held at our offices in One New Change. For more information please contact Andrew Petersen (andrew.petersen@ klgates.com). Norton (matthew.norton@klgates.com) or Mike Tomlinson (michael.tomlinson@ klgates.com). Oxford Real Estate Conference 2015 On 18th March 2015, the K&L Gates London office will be sponsoring the first annual Oxford Real Estate conference 2015. The conference will assemble a group of over 25 global real estate experts to provide insight on “What will the real estate universe look like in 2025?”. Andrew Petersen will be presenting at the conference. The conference is organised by The Oxford Real Estate Society, an Oxford Business Network, which is an organisation Italian and foreign clients with activities For more information please contact Bonny made up of real estate professionals and both in court and out of court. Hedderly (bonny.hedderly@klgates.com) or enthusiasts who share a common interest Steven Cox (steven.cox@klgates.com). in the industry. 8 K&L GATES: OVERRIDING INTEREST SPRING 2015 London office is pleased to be host sponsor For information about our global events program visit klgates.com. 9 OVERRIDING INTEREST Transaction Profile: The Old Royal High School, Edinburgh K&L Gates Advises on Redevelopment of Landmark Edinburgh Building We are proud to be advising Urbanist K&L Gates is advising Urbanist Hotels on the development of the old Royal High School building Hotels on this complex transaction which more than 40 years, having previously been earmarked as a site for the Scottish Parliament. The will involve revitalising this architecturally on Calton Hill in Edinburgh. A landmark on the Edinburgh skyline, the building has been vacant for building is set to be developed into a luxury hotel by Duddingston House Properties and Urbanist Hotels. important neo-classical landmark building Led by London partner Piers Coleman, the K&L Gates team is advising Urbanist on structuring and in the centre of Edinburgh. Borrie (Corporate Partner), Paul Beausang (Tax Partner) and Emma Tuppen (Tax Special Counsel). tax issues and investment arrangements. Other K&L Gates London team members include Stuart David Orr and Taco van Heusden at Urbanist Hotels commented: “We are excited by the opportunity to develop this key Edinburgh building, delivering what we believe will become Scotland’s finest hotel. The team at K&L Gates project managed the transaction for us, providing us with both commercial and practical solutions.” Piers Coleman stated: “We are proud to be advising Urbanist Hotels on this complex transaction which will involve revitalising this architecturally important neo-classical landmark building in the centre of Edinburgh.” Piers Coleman +44.(0)20.7360.8206 piers.coleman@klgates.com 10 K&L GATES: OVERRIDING INTEREST SPRING 2015 11 OVERRIDING INTEREST UK Real Estate Structures Key Vehicles used to Hold UK Real Estate This article gives a brief overview of typical vehicles that are used to hold UK real estate. • limited liability companies, whether located in the UK or elsewhere. Where the vehicle is a “clean” special purpose vehicle (“SPV”), it will contain nothing except for the property and the rent, leases and other contracts, and any registrations and liabilities associated with that property. An SPV may be a convenient way of parcelling up the real estate in a discrete entity with its own legal personality, and which can enter into contracts, including to finance the property, manage the property and/or develop it. Recourse can be contained and limited to the assets of the SPV. The board of the SPV can exercise control and make professional appointments, such as of an asset manager. By buying the shares in the company rather than the property itself, a buyer may make significant savings by not having to pay Stamp Duty Land Tax (“SDLT”). • Jersey property unit trusts (“JPUTs”). These are constituted by trustees who are located in Jersey. Usually the trust instrument follows a well settled form as there are hundreds of JPUTs in existence holding real estate all across the UK. The income in the unit trusts belongs to the beneficiaries of the trust provided that the unit trust is approximately drafted so as to constitute a ‘Baker Trust’, and normally this is recognised for the purposes of UK tax on income. For because the qualifying conditions capital gains tax purposes, the JPUT are stringent. REITs are not used for is treated as a company located in structuring particular transactions in Jersey provided that it is correctly the UK real estate market. controlled and managed in Jersey. The transfer of JPUT units is not usually subject to SDLT. • limited partnerships, registered • PAIFs - property authorised investment funds. These are designed for use where there is widely held ownership. PAIFs are open ended vehicles which under the Limited Partnership Act are tax transparent. They have stringent 1907. These protect the investing conditions. The UK Government has partners from liability provided they been consulting during 2014 on the do not get involved in the control introduction of SDLT relief for the and management of the partnership. seeding of PAIFs, and for the transfer of Accordingly, a general partner (usually interests in PAIFs. a company with limited liability) takes full responsibility for the real estate and any investment strategy and makes all decisions (eg whether to lease the property, who to and on what terms). The general partner may be advised by an investment manager. Sometimes limited partnerships are used in conjunction with JPUTs. Partnerships can be more flexible than corporate vehicles because, for example, they do not have capital maintenance rules or strict rules on A key tax issue on a number of these corporate-wrapped property entities is whether or not they are involved in trading in real estate in the United Kingdom or whether there is investment activity. The level of finance for these structures is primarily a commercial matter and depends on the appetite of the investors for gearing, within prevailing market conditions. The debt arrangements may be structured so The level of finance for these structures is primarily a commercial matter and depends on the appetite of the investors for gearing, within prevailing market conditions. that there is limited recourse to the ultimate beneficial owner. dividends. Partnership interests are This article does not constitute legal advice usually considered to be real estate for on any particular situation. For a fuller the purposes of SDLT and accordingly version of UK Real Estate Structures, the transfer of a partnership interest is please contact one of the authors. subject to SDLT as if the partnership interests were land itself. Partnerships Stuart Borrie are tax transparent for most purposes, +44.(0)20.7360.8155 although not for VAT, though some tax stuart.borrie@klgates.com filings are needed. Paul Beausang • REITs – Real Estate Investment Trusts. Only a small number of very large UK property investment companies have reconstituted themselves as REITs 12 K&L GATES: OVERRIDING INTEREST SPRING 2015 +44.(0)20.7360.8100 paul.beausang@klgates.com James Spencer +44.(0)20.7360.8176 james.spencer@klgates.com 13 OVERRIDING INTEREST Legal Updates and Cases Legal Updates The New Electronic Communications Code Proposals have now been Withdrawn from the Infrastructure Bill by the UK Government Cases Repeat Guarantees in the Context of Excluded Assignments the sellers, repayment of the deposit and roads, flood defences, and railways, A “new” lease had been granted to T1 to rescind the contract and recover the particularly in the North with the and guaranteed by G. T1 then assigned balance of the deposit. They were also intention of building a “northern the lease to T2 in breach of covenant. entitled to recover the sums agreed under We have previously reported on proposals powerhouse” in Manchester to All the parties wanted the lease re- the side agreement. for a new Electronic Communications rival London. vested in T1 and G again guaranteed the Comment: The judgment contains a useful tenant’s obligations under the lease but summary of the case law on rescission of were concerned that the anti-avoidance a contract for the sale of land. Code, which was intended to form part of the new Infrastructure Bill. That Bill would have introduced a reformed version of the Electronic Communications Code (Code). This would have been much welcomed by the real estate industry. The Code gives rights to providers of telecommunications networks to install and maintain apparatus in, over and under land. In February 2013, the Law Commission published a report with various recommendations as to how the Code should be revised. It was widely acknowledged that the Code was unclear, out of date, and inaccessible. Further to an announcement in January it now appears that the Code will remain in its current form, and no announcement has been made as to any proposed future reforms. The 2014 Autumn Statement The Autumn Statement announced a number of measures that are of interest to the real estate industry: • the replacement of old “slab” system of stamp duty land tax (SDLT) on residential properties and its replacement with a number of bands with effect from midnight 3 December 2014 but an increase in the tax rates. • a “root and branches” review of the business rates structure is promised. • investment in infrastructure for • reforms to the planning system. • C ommitments to increase the housing supply. • Improvements to enterprise zones. provisions of the Landlord and Tenant (Covenants) Act 1995 might prevent a simple re-vesting. damages for misrepresentation. The court held that the sellers were entitled Hardy and another v Griffiths and another [2014] EWHC 3947 (Ch) DECs and EPCs The High Court held that T1 could reassign to The Department for Communities and T2 supported by a fresh guarantee from G. Limitation Periods and Planning Local Government will be publishing Comment: An issue left unclear by A landowner sought to rely on the limitation approximately 723,000 records of data Goodharvest and KS Victoria has period in enforcement proceedings. The from Display Energy Certificates and non- been clarified. court held that such reliance is subject domestic Energy Performance Certificates in response to a request made under the Environmental Information Regulations 2004. It has given holders of non-domestic EPCs the chance to opt out of having their UK Leasing Brighton Ltd v Topland Neptune Ltd and Zinc Cobham Ltd v Adda Hotels (an unlimited company) [2015] EWHC 53 (Ch) to a public policy requirement of good faith confirmed by Secretary of State for Communities and Local Government and another v Welwyn Hatfield Council [2011] UKSC 15, which in this case the landowner had not met. The records will be published at address Rescission of a Contract for the Sale of Land and Damages level. The use of the data will be subject to The sellers of a property claimed that they the Welwyn principle may apply to various conditions and re-use of the addresses for had been entitled to rescind a contract circumstances and so the judgment will commercial purposes prohibited. for sale on the grounds that the buyers be of general interest. had failed to complete in accordance with Jackson v Secretary of State for a notice to complete. They also claimed Communities and Local Government The Department for Environment, Food that they were entitled to recover the [2015] EWHC 20 (Admin) and Rural Affairs has announced that it balance of the deposit under the terms aims to establish Flood Re by July 2015. of the contract and further damages for The European Commission has approved breach of a side agreement between the the scheme under the EU state aid parties. The buyers claimed that they were rules. A draft scheme document is to be entitled to rescind the contract as a result published shortly. of (non-fraudulent) misrepresentation by information published. Flood Risk 14 K&L GATES: OVERRIDING INTEREST SPRING 2015 Comment: The court discussed how which 15 Anchorage Austin Fort Worth Frankfurt Orange County Beijing Harrisburg Palo Alto Paris Berlin Boston Hong Kong Perth Brisbane Houston Pittsburgh Brussels London Portland Charleston Los Angeles Raleigh Charlotte Melbourne Miami Research Triangle Park Chicago Milan Dallas Moscow San Francisco Doha Newark São Paulo Dubai New York Seattle Seoul Shanghai Singapore Spokane Sydney Taipei Tokyo Warsaw Washington, D.C. Wilmington K&L Gates comprises more than 2,000 lawyers globally who practice in fully integrated offices located on five continents. The firm represents leading multinational corporations, growth and middle-market companies, capital markets participants and entrepreneurs in every major industry group as well as public sector entities, educational institutions, philanthropic organizations and individuals. For more information about K&L Gates or its locations, practices and registrations, visit klgates.com. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. ©2015 K&L Gates LLP. All Rights Reserved.